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British Columbia’s new franchise regulation: How do B.C.’s requirements stack up?

Almost a year to the day after the introduction of Bill 38 in the British Columbia legislature, the B.C. government released the regulation to its Franchises Act (the B.C. Act) on October 3, 2016. The bill was pushed through the legislature in under a month last October and, contrary to expectations, the regulation (the B.C. Regulation) was released in final form without a public consultation process. The B.C. government has set February 1, 2017, as the date on which the Act and the B.C. Regulation will come into effect. British Columbia is the sixth province in Canada to pass franchise legislation, with Alberta, Manitoba, Ontario, New Brunswick, and P.E.I. being the others (together with British Columbia, the Regulated Provinces).

Our Update published on October 9, 2015, addressed some of the key elements of the B.C. Act. Generally speaking, the B.C. Act and the B.C. Regulation closely mirror the legislation and regulations of the other Regulated Provinces. The B.C.’s disclosure obligations and related exemptions, financial statement disclosure obligations and related exemptions, and certification standards are all similar to those of the other Regulated Provinces. While not intended to serve as an exhaustive summary, we have outlined below the key similarities and differences that will be of interest to franchisors.

Wrap-around disclosure documents

Like other Regulated Provinces (except Ontario), the B.C. Regulation allows franchisors to use a disclosure document that is prepared to comply with the disclosure requirements of another jurisdiction. Also like the other Regulated Provinces, franchisors that choose to use a “wrap-around” disclosure document must include any additional information that is necessary for the disclosure document to comply with the B.C. Act and the B.C. Regulation.

Deposits

The payment by a prospective franchisee of a fully refundable deposit prior to the disclosure period elapsing does not breach the B.C. Act. Like Alberta and Manitoba, the B.C. Act and the B.C. Regulation provide that a fully refundable deposit is a deposit that does not exceed 20% of the initial franchise fee (in Manitoba the maximum deposit is capped at $100,000), is refundable without deduction and is given pursuant to an agreement that does not oblige the prospect to enter into a franchise agreement. The B.C. Act also contains a provision requiring that the deposit be refundable without any deductions, if the prospect does not enter into a franchise agreement.

Risk warnings

Like other Regulated Provinces (except Alberta, which does not include prescribed risk warning statements, and except New Brunswick, which does not require the risk warning statements to be included at the beginning of the disclosure document), risk warning statements are prescribed and are required to be included together at the beginning of the disclosure document. The B.C. Regulation adopts the same risk warning statements as P.E.I., New Brunswick and Manitoba.

Methods of delivery

Although all of the other Regulated Provinces (except Alberta, which does not deal with methods of delivery at all) explicitly allow for electronic delivery of disclosure documents, the B.C. Regulation is the only one that (subject to certain conditions) specifically addresses delivery by "electronic means, including email.” It is important to remember that a written acknowledgement of receipt must be received by the franchisor from the franchisee for this delivery method to be effective.

The B.C. Regulation also allows for prepaid courier delivery, but the courier service must allow for tracking and confirmation of receipt of the delivery. This is unique among the Regulated Provinces and will likely limit courier choices to major courier service providers. The P.E.I. and B.C. regulations require written acknowledgement of receipt from the prospective franchisee for courier delivery to be effective; the other Regulated Provinces do not impose conditions on the use of prepaid courier delivery.

Financial statements

The financial statement requirements are similar to those of other Regulated Provinces. However, the B.C. Regulation (like Alberta’s) recognizes the accounting standards of the Chartered Professional Accountants of Canada and of the International Auditing and Assurance Standards Board.

The B.C. Regulation differs in the situation where a franchisor has operated for less than one fiscal year or if 180 days have not yet passed since the end of the first fiscal year of operation and financial statements for that year have not been prepared. In that case, in all Regulated Provinces, a franchisor may disclose only an opening balance sheet. None of the other Regulated Provinces imposes a standard for such opening balance sheets. The B.C. Regulation, however, requires that the opening balance sheet be prepared and reported on in the same manner as required of financial statements.

Advertising funds

The B.C. advertising fund disclosure requirements are less onerous. Ontario, Manitoba and New Brunswick, for example, require disclosure of the percentage of funds used in national and local advertising during the prior two fiscal years, the percentage retained by the franchisor during the prior two fiscal years and similar projections for the current fiscal year. The B.C. Regulation only requires a description of the advertising fund including (a) the amount or basis for determining the amount of funds, (b) the frequency of the franchisee's required contribution to the fund, (c) the administration of the fund including what portion of the fund may be used for the administration of the fund and the persons who administer the fund and (d) whether reports on advertising activities financed by the fund will be made available to the franchisee (this last requirement exists in all the Regulated Provinces).

Training and manuals

Like other Regulated Provinces (except Alberta), disclosure of any training offered must be included. B.C. is unique among the Regulated Provinces in stipulating that a statement specifying who bears the training costs must be included, regardless of whether the training is mandatory or optional. Other Regulated Provinces require this statement only in the event that the training is mandatory.

Similar to New Brunswick and Manitoba, if the franchisee will be required to operate in accordance with manuals provided by the franchisor, then the disclosure document must either include the table of contents of each manual required or include a statement specifying where the manuals are available for inspection. In New Brunswick, the manual must be available at a location in New Brunswick.

Territory and proximity

If territorial rights are granted, franchisors must include a description of “the franchisee’s rights to the territory, including the manner in which and the person by whom” the rights will be determined. In New Brunswick and Manitoba, if an exclusive territory is granted under the franchise agreement the franchisor must describe the exclusive territory or the manner in which and the person by whom the territory will be determined. Ontario and Alberta simply require a description of any exclusive territory granted to the franchisee. It should be noted that the B.C. Regulation uses the term “territory” not “exclusive territory” as is the case in all of the other Regulated Provinces.

Unique among the six Regulated Provinces, the B.C. Regulation does not require a description of the franchisor's policy on proximity between existing franchises. In B.C., franchisors will not have to disclose their practices and policies concerning how they decide where to place franchisees in relation to one another, unless this information is required to be disclosed as a “material fact.”

Under the B.C. Regulation, franchisors are required to describe any reservation of rights to (i) market goods or services that are the same as those sold or distributed by the franchisee (under the same or different marks or advertising) or (ii) to distribute those goods or services via internet, telephone, catalogue sales or by other means. Manitoba is the only other Regulated Province to address reserved rights in its franchise legislation, but it only requires franchisors to describe rights reserved under (ii) above.

Alternative dispute resolution

Like every other Regulated Province (except Alberta whose legislation is silent on the issue), the B.C. Regulation requires disclosure of the franchisor’s restrictions or requirements with respect to alternative dispute resolution processes, including requirements related to the location or venues. However, unlike any of the other Regulated Provinces, the B.C. Act contains a provision that makes it clear that the governing law and venue provision in the legislation applies to any arbitration proceeding. This means that arbitration must be conducted in B.C. and pursuant to B.C. law.

Unlike Ontario and Manitoba, the B.C. Regulation does not prescribe language pertaining specifically to mediation. There is also no prescribed mediation process like that provided under the New Brunswick regime.

Certificates

The B.C. Regulation requires that franchisors attach a franchisor’s certificate to a statement of material change (SMC). The certificate must state that the SMC contains no untrue information and includes every material change that is required to be disclosed. Each of the other Regulated provinces (except Ontario) has a similar, explicit requirement for the use of franchisor’s certificates in respect of SMCs.

Current and former franchisees

There are several similarities and a key difference between the B.C. Regulation and the other provincial disclosure requirements with respect to the lists of current and past franchisees that must be included.

A list of current franchisees in Canada must be included. B.C. has a significantly broader geographic scope than the other Regulated Provinces, which generally require a list of the locations within the applicable province (with the exception of P.E.I., which calls for franchisees in P.E.I., New Brunswick and Nova Scotia to be included).

A list of current businesses of the same type as the franchise being offered that are operated by the franchisor in Canada. This mirrors a similar requirement in the Alberta, Manitoba and New Brunswick regulations, in contrast to the Ontario and P.E.I. regulations.

A list of former franchisees that were terminated, cancelled, reacquired, not renewed or that otherwise left the system in Canada within the immediately preceding fiscal year. This requirement is uniform throughout Canada.

A total number of franchises in Canada within the last three fiscal years that have been terminated, not renewed or reacquired. This is similar to the requirement in Alberta. P.E.I., Manitoba and New Brunswick do not have similar requirements.

Negative statements

The B.C. Regulation also requires franchisors to make negative statements with respect to certain prescribed matters. Where the franchisor does not provide an earnings projection, an estimate of operating costs, training, manuals or a territory, the franchisor must include a statement or statements to that effect. Only New Brunswick and Manitoba have similar requirements for negative statements.

Guarantees and security interests

Unlike in Ontario and Alberta, guarantees and security interests required of the franchisee must be disclosed.

Trademarks

Like other Regulated Provinces (except Alberta), disclosure of trademarks and proprietary rights afforded to the franchisee must be included.

Licenses, registrations and authorizations

Like Ontario, New Brunswick and Manitoba, disclosure of any licences, registrations, authorizations and other permissions (approvals) required of the franchisee must be included. The B.C. Regulation, however, does not place an obligation upon the franchisor to determine every approval required under any applicable federal or provincial law or municipal by-law for the franchisee to operate the franchise, but merely requires the disclosure of the approvals that the franchisor requires the franchisee to acquire, as well as a statement declaring that other approvals may be required and inquiries must be made. This approach is in line with those used in Manitoba and New Brunswick, and differs from the Ontario approach (where there is an obligation upon the franchisor to disclose all approvals required under applicable federal or provincial law or municipal by-laws).

Unilateral amendments

New Brunswick remains the only jurisdiction in Canada that requires the franchisor to disclose in the disclosure document the fact that it has the unilateral right to amend terms of the franchise agreements.

Alternative dispute resolution

Like other Regulated Provinces (except Alberta whose legislation is silent on the issue), the B.C. Regulation requires disclosure of the franchisor’s restrictions or requirements with respect to alternative dispute resolution processes including requirements related to the location or venues. However, unlike any of the other Regulated Provinces, the B.C. Act contains a provision that makes it clear that the governing law and venue provision in the legislation applies to any arbitration proceeding. This means that arbitration must be conducted in B.C. and pursuant to B.C. law.

Unlike Ontario and Manitoba, the B.C. Regulation does not prescribe language pertaining specifically to mediation. There is also no prescribed mediation process like that provided under the New Brunswick regime.

Large franchisor exemption

The net worth requirement of the large franchisor exemption to financial statement disclosure is $5 million. This aligns with the Alberta, Ontario and Manitoba exemptions. P.E.I. and New Brunswick have a $2 million net worth requirement.

Overall, the introduction of the B.C. Regulation in substantial conformity to that of the other Regulated Provinces should be seen as a positive step toward harmonization of the provincial franchise regimes. However, there are enough differences (some of them so nuanced that they risk being overlooked) that franchisors will need to pay careful attention when revising their national franchise disclosure documents or creating a disclosure document for B.C..